Booming U.S. Oil Exports Could Hit A Bottleneck

U.S. crude oil exports have been setting new records lately, but as both the U.S. oil production and exports are set to increase, analysts and traders warn that booming exports may reach infrastructure limitations in two to three years, which would weigh on U.S. oil prices due to high domestic production with constrains in takeaway capacity.

U.S. crude oil exports hit a record-high of 1.98 million bpd in the week to September 29, according to EIA data. This was the highest weekly average since the U.S. removed restrictions on crude oil exports at the end of 2015, after a four-decade ban. For the week to October 20, the latest available weekly EIA data, U.S. crude oil exports averaged 1.924 million bpd.

Oversupply due to Harvey prompted the higher exports, which created a wide spread of around $6 between WTI and Brent prices, causing buyers to show preference for the cheaper U.S. crude grade. The spread is wide enough to offset shipping costs to destinations like Asia and Europe.

“Get to a $4 spread and you can take it anywhere in the world,” R.T. Dukes of Wood Mackenzie told The Wall Street Journal last month.

According to analysts surveyed by Reuters, U.S. crude oil exports could start hitting infrastructure bottlenecks such as shipping traffic, dock space, and pipelines to ports, if American exports increase to 3.5 million bpd or 4 million bpd.

“Two to three years down the road, if U.S. production continues to grow like current levels, the market will eventually signal that more infrastructure is needed. But I don’t think a lot of those plans are in place right now,” Michael Cohen, head of energy markets research at Barclays, told Reuters.

According to Carlin Conner, chief executive at SemGroup, the owner of the Houston Fuel Oil Terminal:

“There aren’t very many terminals with the needed pipeline capabilities, tank farm capacity and proper docks to load the ships…. Adding this is expensive and not done easily. So there are limitations to unfettered export access,” Conner tells Reuters.